Yes, debt is part and parcel of sound financial management for an SME. But be careful: It must leverage growth, have a positive purpose and work toward an intelligent and realistic business vision. A solid understanding of this concept can make all the difference in a company’s success.
Right off the bat, Stéphane Royer, Manager, Special Loans and Risk Management at Desjardins Group, insists that debt is perfectly normal, even advisable, for a company. However, he stresses the importance of properly managing this debt and, above all, incurring it for the right reasons.
Is it normal for a company to be in debt?
Yes, and it’s warranted so long as this debt promotes profitable growth, opens new markets, etc. This is called “good debt.” A company often needs financing to purchase new, more efficient equipment, to automate, to expand facilities or to acquire another company. Yet, the loan must be reasonable, well thought-out and based on objectives and a business vision that are clear. There are normal investment cycles, but the goal of reducing that debt to reach a more comfortable financial maturity level remains.
The bottom line is that good debt is productive and provides the company with essentials for growth, progress and expansion. Bad debt is incurred to make up for income loss or to make unnecessary purchases.
When should you be worried?
The dangerous side of debt is when you can no longer pay it off, invest in the company’s growth and deal with unexpected events. When there’s no more wiggle room, debt becomes overwhelming and even worrisome.
For example, if you’re denied financing by your financial institution, you may be tempted to keep switching institutions until you get what you want, on terms that will make the situation worse. Avoid slipping into denial at all costs and take heed of the warning signs.
Trust the key people who help you make financial decisions, like for example, a finance vice-president, an account manager or another professional. You’re surrounded by skilled people from different backgrounds with an array of knowledge to act as advisors and challenge you through your business plans and decisions.
Of course, the current global situation calls for managing finances carefully, and making tough business decisions. Remember that these decisions are temporary and crucial in preparing for nasty surprises in the long run. Managing a crisis means focusing on the short term.
Two heads are better than one!
You can face the music and tackle real issues. Just knock on the right doors. There are specialists in business assistance and crisis management. Skilled advisors will help your company with the legalities and explore ways to find tailored solutions. They’ll help keep your organization running smoothly.
There are often different ways to finance a project or resolve a difficult problem, but sharing ideas and being transparent will help you find the best solutions. There’ll be some decisions to make, but with the right support, you can do it. With an action plan and a suitable financial package, you’ll have a bird’s-eye view of the situation. Certain aspects you hadn’t considered may surface.
That’s business coaching working its magic.